Why is it the default that everyone files their taxes? How long does that take, on average?
Here's how it could work, based on a real-world example from another country:
Before each tax season begins, the IRS sends each taxpayer an estimate of how much they are expected to earn that year, based on previous years. They are assigned a tax bracket based on this estimate. If they think the estimate is wrong, they send back a new number and their tax bracket is adjusted accordingly. The taxpayer can also give estimates of their deductions at this point, for a more accurate estimate of the tax bracket.
Employees withhold taxes from wages before payment, based on the tax bracket each employee is in. They report the wages paid and pay the IRS the withheld amount.
Investment funds etc. are required to report gains and losses for each of their clients to the IRS.
At the end of the year, the IRS sums up the income they know about from these reports, compare the sum due to the sum already paid from withheld taxes and send the taxpayer a summary. If the taxpayer has no other income to report, and has no complaints about the data the IRS already has, they don't need to file anything further. The report comes with a bill for taxes remaining, or if too much has been paid, a summary of how much will be returned.
For the majority of taxpayers, that is, those whose source of income is wages from employment or government benefits, all this takes maybe 10 minutes a year to handle. Some people still need to file, but they're a minority.
Because companies like H&R block and TurboTax make a lot of money on it. For most people their taxes really are simple enough for what you say to work and be cheaper for everybody. In fact the IRS already has all the numbers for most people to do that, or if they don't you have an accountant to handle your finances anyway who can quickly give the IRS those numbers. However by making you enter all the numbers and calculate things it gives the third parties a reason to exist.
I used to do my taxes by hand: it was actually faster than the online system I use now - mostly because it was a lot quickly to skip the section dealing with rail road retirees and such. I quit doing it only because one time I missed copying line 13 of form 1234 to line 47b or form 5678 and got the wrong numbers. A simple mistake that the IRS caught right away, but then I had to go refile my state taxes which depended on the wrong numbers: that was painful enough I quit doing it by hand. (why the state didn't also catch the mistake and avoid the whole refile garbage I don't know)
The UK system is very smooth as a small business owner.
When an employee leaves a job they are given a P45 form to hand to the new employer, which contains a summary of any pay to date for the current tax year along with a tax code.
All I have to do when hiring is enter this information into the accounting software and everything just works. National Insurance, Pensions and Student Loans are calculated monthly and taken via Direct Debit, as are VAT payments and returns. Employees are automatically emailed payslips with breakdowns of their pay and deductions.
Any relevant information is submitted to HMRC (the UK's IRS) by the accounting software, so it takes me ~10 mins a month to complete payroll for 5 employees. When an employee leaves, creating a P45 for the next employer takes a single click.
The gov.uk website is exceptionally well organised and contains detailed lists of everything an employer or employee needs to do at all stages in the process.
The US self-assessment system seems opaque, inefficient and ripe for abuse in comparison. It also places the stress of reporting taxes onto every individual rather than just the employers.
As a fellow British small business owner I assume you're familiar with the UK's self-assessment scheme as well? I've always found it to be very quick and painless, and unlike the US system there's no need to get an accountant or even any specialised software involved.
I was really surprised how easy it was, it takes maybe 10 mins if you have the information and logins to hand.
Honestly I can't think of many ways to improve the UK's online accounting process from either an employer or employee's standpoint because I already spend less than a day total per year on it.
And in Germany. In Germany, if you are an employee and not a freelancer or self-employed, you don’t have to file taxes at all. You can of course, if you think your deductibles are higher than the deductibles that are automatically applied.
Same in the Netherlands. It takes me all of ten minutes each year to file taxes for my partner and myself, and most of that is spent authenticating in the provided webapp.
Not quite true - I'm salaried, but because I earn over a specific amount, and have children, I have to file a tax return. However, this is basically a matter of copying some numbers from one government website to another government website, and doesn't require any particular expertise, just about a hour or so of tedium.
You do not have to check the numbers in Norway, you can simply assume that Skattettaten has got it right and just let it go. After all if you check and see that everything is correct you do not do anything else, you do not confirm the correctness of the numbers, you just don't correct them. At least that's the way it was last time I did it, in April this year.
Most of the rest of the developed world has the national tax agency compute the tax filing for you based your family ages, employer-filed work income and financial institution income. Then its merely a choice to accept or modify, taking as little as a few minutes. 3/4ths US tax returns would be that simple.
Most of the rest of the developed world has the national tax agency compute the tax filing for you based your family ages, employer-filed work income and financial institution income.
The annoying thing is that the U. S. does this, too. They just wait until the numbers don't match before they tell you what their number is. Hey, why don't you tell me that number up front and save us a lot of trouble? Because I just paid several thousands dollars recently because our numbers didn't match up. The IRS already knew, "here's your bill". A lot of back-and-forth could have been saved if the IRS said up front before I filed, "here's what we've got, just to give you a ballpark figure to work with and let you know if we're lining up, or have a problem."
It is an actual political goal of the GOP to make filing taxes painful. The result is that there is built up resentment to the whole notion of raising taxes since it is associated with such an "inefficient" process.
In the UK, HMRC take my monthly pay and use it to estimate my annual salary, which is enough for almost everyone. If you get a bonus, you can fill in a field online that says "no this is what I think my income is", and it goes away. At the end of the year, you get a statement of what HMRC thought your income was, and if that's right, you do nothing. If it's wrong, you file.
Here's how it could work, based on a real-world example from another country:
Before each tax season begins, the IRS sends each taxpayer an estimate of how much they are expected to earn that year, based on previous years. They are assigned a tax bracket based on this estimate. If they think the estimate is wrong, they send back a new number and their tax bracket is adjusted accordingly. The taxpayer can also give estimates of their deductions at this point, for a more accurate estimate of the tax bracket.
Employees withhold taxes from wages before payment, based on the tax bracket each employee is in. They report the wages paid and pay the IRS the withheld amount.
Investment funds etc. are required to report gains and losses for each of their clients to the IRS.
At the end of the year, the IRS sums up the income they know about from these reports, compare the sum due to the sum already paid from withheld taxes and send the taxpayer a summary. If the taxpayer has no other income to report, and has no complaints about the data the IRS already has, they don't need to file anything further. The report comes with a bill for taxes remaining, or if too much has been paid, a summary of how much will be returned.
For the majority of taxpayers, that is, those whose source of income is wages from employment or government benefits, all this takes maybe 10 minutes a year to handle. Some people still need to file, but they're a minority.